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Real-estate investments propelled Blackstone Group LP to strong profits in the second quarter, but the giant private equity firm warned that deals in general were becoming expensive.

Private equity firms have seen the value of their portfolios recover as stock markets have risen, and Blackstone said the improvement in valuation and increased fee income boosted earnings.

“The star performer in the quarter was real estate,” Blackstone’s President Tony James told reporters on a conference call. “Purchasing assets from distressed sellers has been the dominant focus of our real estate activities over the last year.”

Blackstone has $7.4 billion of “dry powder” — capital available to invest — in real estate and $17 billion in private equity. It has also started raising a new real estate fund that it previously said would be around $10 billion.

“Fund-raising in real estate continues to go well with our flagship global fund receiving a strong reception,” James said.

James added that Blackstone has finished fund-raising for its latest private equity fund, BCP VI, with more than $16 billion raised.

Finding places to invest that private equity capital, however, has proven to be tricky.

While Blackstone has been finding opportunities, such as its acquisition of German outdoor clothing brand Jack Wolfskin, announced earlier on Thursday, in general it is “difficult to find value,” James said, adding that prices are high due to an abundant availability of credit.

“The plain vanilla auction (of big companies) is pretty expensive, but we continue to look at a lot of things and have come close to a couple of big things in … the U.S.,” said James. He said Blackstone has potential deals in the pipeline that it is pursuing.

The Jack Wolfskin deal is about 700 million euros ($994 million), according to a source close to the transaction.

Still, Blackstone said it was paying less than the average multiple paid in the industry for buyout deals. It said it is searching for proprietary deals, as opposed to auctions.

Eyeing Africa, Russia

Blackstone has been scouring the world to find opportunities and James said he’s very optimistic on Brazil.

In Asia, Blackstone is working on some opportunities, although it is “again pretty pricey out there”, said James.

“The long-term future of China is powerful, but you still have to find value and you have to find companies available for sale and that has been a bit more challenging,” he said.

James is hoping to make some investments in Russia, after Blackstone recently established a presence in Moscow.

“We are intrigued with Russia and are putting some resources there to get closer to the market … and I’m hopeful that we’ll find some very interesting things there,” said James.

Blackstone is also considering Africa, where there has not yet been much investment from the large private equity firms.

“We don’t have the infrastructure in place now to have a sort of full-frontal assault on Africa,” James said. “I’d say it’s toe in the water there in Africa.”

Earnings Beat

Blackstone’s second-quarter economic net income was $703 million, up from $205 million a year earlier. Adjusted ENI was 63 cents per share, up from 18 cents a year earlier and above analysts’ average forecast of 33 cents, according to Thomson Reuters I/B/E/S.

The company’s shares rose 4.6 per cent to $17.01.

The value of its private equity funds rose 9 per cent in the second quarter while its real estate funds rose 6.7 per cent.

Its private equity funds are now valued at 1.5 times original cost, while real estate is valued at 1.4 times original investment.

James said that real estate had a disproportionate impact on performance fees this quarter because Blackstone is in a “catch-up period” in its two largest real estate funds.

Private equity firms typically take 20 per cent of the profits, or “carry,” of the funds they invest — but only after investors have earned a rate of return of 8 per cent.

James said that after the 8 percent is earned, Blackstone receives 80 per cent of incremental gains over that 8 percent until it has earned a total of 20 per cent of all gains.

“Thereafter, we receive 20 per cent of any further gains,” said James. “We’re now through the catch-up period in these funds, so performance fees will be back to the 20 per cent.”